Research and Analysis of the Impact of Tax on Local Manufacturing of Pesticides - Agrochemicals Association of Kenya (AgroAK)

Over the years there have been numerous changes to the business enabling environment that have had implications on the sector from the collapse of the East African community in 1977 to the enacted of the Pest Control Products Act, Cap 346 in 1982.

The Issue

Prior to 2014, the Value Added Tax Act, (Chapter 476 of the Laws of Kenya) and previous Finance Acts had zero-rated pest control products.

The VAT Act, 2013 exempted 16% VAT from pest control products and introduced VAT on all imported ingredients for local processing/formulation of pest control products under various HS codes. HS Code stands for Harmonized Commodity Description and Coding System that has become the worldwide standard for describing commodities in a standardised way across various platforms and authorities like customs and port.

The VAT was further incurred on other inputs such as packaging materials, labour and transport which cannot be claimed back due to the ‘exempt clause’. In addition to VAT on the active ingredients, carrier materials, solvents and emulsifiers also attract a 10% import duty and 25% excise duty.

This has made locally manufactured pesticides more expensive than importing already formulated and packaged products which are also exempted from excise and import taxes.

Consequently, importation of finished pesticide product was becoming more favourable than manufacturing in Kenya. Local manufacturers, who had been formulating pesticides for EAC and COMESA markets, are being driven to scale down their operations and investments in the local formulation of pesticides.

For instance, a firm which used to produce 500 tonnes (2.5 million bottles) annually of one particular pesticide in packages of 200gm (as preferred by farmers), had now cut down production to 40 tonnes annually, their clients preferring to import this product.

There are 17 companies that manufacture pesticides in Kenya, collectively employing approximately 20,000 people who are at risk of losing their jobs. Investments in the supply chain had also declined as demand for packaging materials and labels reduces. This had led to the loss of revenue to the government due to ‘disinvestment’ and loss of jobs in agrochemical manufacturing and loss of value added in Kenya.

AgroAK’s Position

AgroAK sought to convince the National Treasury to zero-rate VAT and reduce import taxes on imported ingredients and inputs for manufacturers of pesticides to ensure the survival of the sector.

AgroAK undertook a study to gather evidence on the actual depth of the impact of this taxation framework on the sector. The study would also explore possible proposals to the government.

Its position was the same as that which applied in the Pharmaceutical industry and on which the Federation of Kenya Pharmaceutical Manufacturers (FKPM) successfully lobbied the National Treasury as per the Finance Act, 2015.

Outcome

Following engagement with government, AgroAK successfully lobbied for the tax exemption on inputs for pesticides. A full list of tax-exempt products a listed in an article How Tax Works by the Kenya Revenue Authority.